PACIFIC ISLANDS POLICY 1 Is That the Best You Can Do? A Tale of Two Micronesian Economies FRANCIS X. HEZEL, S.J. THE EAST-WEST CENTER is an education and research organization established by the U.S. Congress in 1960 to strengthen relations and understanding among the peoples and nations of Asia, the Pacific, and the United States. The Center contributes to a peaceful, prosperous, and just Asia Pacific community by serving as a vigorous hub for cooperative research, education, and dialogue on critical issues of common concern to the Asia Pacific region and the United States. Funding for the Center comes from the U.S. government, with additional support provided by private agencies, individuals, foundations, corporations, and the governments of the region. THE PACIFIC ISLANDS DEVELOPMENT PROGRAM (PIDP) was established in 1980 as the research and training arm for the Pacific Islands Conference of Leaders—a forum through which heads of government discuss critical policy issues with a wide range of interested countries, donors, nongovernmental organizations, and private sector representatives. PIDP activities are designed to assist Pacific Island leaders in advancing their collective efforts to achieve and sustain equitable social and economic development. As a regional organization working across the Pacific, the PIDP supports five major activity areas: (1) Secretariat of the Pacific Islands Conference of Leaders, (2) Policy Research, (3) Education and Training, (4) Secretariat of the United States/Pacific Island Nations Joint Commercial Commis- sion, and (5) Pacific Islands Report (pireport.org). In support of the East-West Center’s mission to help build a peaceful and prosperous Asia Pacific community, the PIDP serves as a catalyst for development and a link between the Pacific, the United States, and other countries. Is That the Best You Can Do? ABOUT THE SERIES Pacific Islands Policy examines critical issues, problems, and opportunities that are relevant to the Pacific Islands region. The series is intended to influence the policy process, affect how people understand a range of contemporary Pacific issues, and help fashion solutions. A central aim of the series is to encourage scholarly analysis of economic, political, social, and cultural issues in a manner that will advance common understanding of current challenges and policy responses. Pacific Islands Policy co-editors and editorial board members are all affiliated with or on the staff of the Pacific Islands Development Program (PIDP) at the East-West Center. Series Co-Editors: Robert C. Kiste Adjunct Senior Fellow, PIDP Professor Emeritus, University of Hawai‘i Gerard A. Finin Deputy Director, PIDP Editorial Board Sitiveni Halapua Director, PIDP Tara Kabutaulaka Research Fellow, PIDP Geoffrey White Senior Fellow, PIDP Professor of Anthropology, University of Hawai‘i PACIFIC ISLANDS POLICY 1 Is That the Best You Can Do? A Tale of Two Micronesian Economies FRANCIS X. HEZEL, S.J. Published by the East-West Center A PDF file and information about this publication can be found on the East-West Center website. To obtain print copies, please contact: Publication Sales Office East-West Center 1601 East-West Road Honolulu, Hawai‘i 96848-1601 U.S.A. Telephone: (808) 944-7145 Facsimile: (808) 944-7376 Email: [email protected] Website: www.EastWestCenter.org ISSN 1933-1223 (print) and 1933-172X (electronic) ISBN 978-0-86638-208-3 (print) and 978-0-86638-209-0 (electronic) © East-West Center 2006 Table of Contents Executive Summary 1 The Plea to Grow an Economy 5 The Postwar Economics of Austerity 7 About-Face in the 1960s 9 On the Eve of Independence 11 Under Compact Funding Today 14 Overview of the Economies 16 Diagnosis and Remedies for Ailing Pacific Economies 18 Redefining the Issues 21 » Is Development Possible? 22 » Cultural Constraints 22 » Hard Choices 23 Is There Another Option? 24 Should Standards Be Relaxed? 27 A Course for the Future 29 Rethinking Our Position 33 Bibliography 37 The Author 41 Is That the Best You Can Do? 1 Executive Summary The Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) became self-governing states in free association with the United States in 1986 and have other similarities that distinguish them from the Republic of Palau and the Commonwealth of the Northern Marianas. The latter are the other two entities in Micronesia that were also part of the former U.S. Trust Territory of the Pacific Islands. In this report, Francis X. Hezel, S.J., analyzes economic development initiatives and their underlying assumptions in the FSM and RMI. He poses a fundamental question: Are the small island states of Micronesia capable of achieving self-sustaining economies? During the Trust Territory era, it was simply assumed that the United States would lead the islands to economic independence. The means were never specified, but, nonetheless, there was widespread optimism that a cash economy based on local resources would somehow grow alongside the subsis- tence economy. However, Trust Territory budgets barely covered the costs of administration, capital investment of any kind was virtually nonexistent, and local economies remained stagnant. The early 1960s witnessed a major shift in policy, and conventional approaches to economic development were implemented. Initially it was assumed that an investment in human resources would produce the desired results. Within a decade, budgets were increased tenfold, and large sums were invested in education and health. In the 1970s, the emphasis shifted to infra- structure investment, the next hoped-for key to success. An unintended con- sequence of both initiatives was that the public sector became the largest source of aid employment. Wages and other government expenditures stimulated only modest development in the private sector, which remained disappointingly small. Most such efforts were marginally successful at best. In the last analysis, little in the way of economic development was achieved and the FSM and RMI became heavily dependent on the United States. The arrangements for self-governance in the 1980s were set forth in the Compacts of Free Association for the two nations. Beginning in 1986, the 2 Francis X. Hezel, S.J. United States provided generous financial support for a period of 15 years, and it was anticipated that Micronesians would chart their own course to achieve some measure of self-sustainability. At the end of the allotted time that goal remained as elusive as ever. Funding was extended until 2004 when a second round of Compacts was negotiated for both nations. These cover a period of 20 years and provide an exit strategy for the United States, whose direct assis- tance will end in 2024. There is little optimism that self-sufficiency will be achieved within that time frame, and the United States is committed to estab- lish trust funds that are intended to generate income sufficient to replace American subsidies. The FSM and RMI have never been short of external advisers. Agencies of the U.S. government, the Asian Development Bank, and other international financial institutions have offered similar recommendations. All are based on notions common to conventional Western economic thought, and the minimal recommendations are standard fare: reduction of the public sector in favor of private sector growth, decreased dependency on overseas assistance by internally generated economic growth, greater transparency and impartiality in govern- ment, and the creation of a hospitable environment for investment, including the commoditization of land. In earlier years, Hezel was comfortable with conventional approaches to economic development, but his observations in this paper reveal a change of heart. Conventional approaches have failed and Hezel has reservations about today’s prevailing recommendations. These plans, he believes, conflict with tra- ditional cultures that emphasize the communal values of sharing labor and resources within extended families and the larger community. The issue of land is particularly sensitive. Land is held by extended kin groups, and the very structure of social relations and organization is largely based on inherited rights to land. Attachments to ancestral lands are deep and spiritual-like in quality. Identities are rooted in land, and the products of the land represent security. Land is largely inalienable, not a commodity for the auction block. Hezel has come to doubt that the limited resources of the small islands will ever provide the means to support self-sustaining cash economies. Hezel has also been influenced by the work of other researchers who have analyzed the so-called MIRAB economies first described for several Polynesian nations. These economies, and the acronym, are based on the now familiar elements of migration, remittances, aid, and bureaucracies. Migrants living and working abroad send remittances to their relatives back home. Financial assistance continues from overseas donors, and in some instances has been increased. Traditional economists view MIRAB economies as anomalies. It is argued that such economies are precarious because they are not based on local Is That the Best You Can Do? 3 resources and are dependent on factors external to and beyond the control of the island nations. Such critics ignore the fact that the value of local resources and products offered for export are also determined by larger world markets. Furthermore, the elements that make up MIRAB economies are nowhere endangered or under threat. Those economies have proven stable over time and provide higher standards of living than predicted by traditional models. Trust funds are compatible with MIRAB economies and add a new variable to the equation. The FSM and RMI have all the elements of MIRAB economies but one. As well as financial assistance, the Compacts of Free Association provide Micro- nesians with free access to the United States and its possessions, and many thousands have migrated to the United States, Guam, and the Commonwealth of the Northern Marianas. The migration of substantial numbers of Micro- nesians has been relatively recent, and to date, remittances have been negligible.